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The major event of this week will be Theresa May’s speech, in which she will set out her ‘plan’ for the Brexit negotiations. According to aides, the word ‘plan’ is very deliberate and implies that her approach in some areas might change prior to actual negotiations starting when Article 50 is formally triggered in March. Nevertheless, it would seem likely that any announcements accompanying the start of formal proceedings are likely to be inconsequential. Press comments over the weekend have convinced the markets that May’s speech will outline a ‘hard’ Brexit approach, and GBP has fallen this morning in response. Currently, the GBP/USD rate is trading at 1.2023, just below the previous post-Brexit vote low of 1.2131 reached in October. Meanwhile, the GBP/EUR rate has fallen to 1.1345.
The foreign exchange market is clearly trading on the assumption that GBP will come under further pressure over the coming week, but with a hard Brexit already discounted, the pound’s scope to fall closer towards parity with USD may be limited. It may largely hinge on whether the Prime Minister’s plan includes raising the white flag over negotiating for respite from the consequences of leaving the customs union. Of particular interest to us, of course, is whether our ‘passport’ to be able to undertake business in EU member countries will be terminated. Rather more important for the UK economy is whether the City will be able to maintain its position of primacy in the European financial markets. This will be key in banks’ decisions on whether to maintain their international operations almost exclusively in London or whether to move some of their key areas to Frankfurt, Paris or elsewhere.
This week would have been quite interesting even without May’s speech, as we will see the announcement of the latest inflation, producer price indices, labour market data and retail sales figures. The relevance of most of these has been put into context by predictions of woe for the retail sector, the actual performance of that sector over the Christmas period, and the comment from the Bank of England’s Financial Policy Committee that consumer spending is growing at a rate that makes it uncomfortable.
It is difficult to see how the Bank of England can raise questions over the growth of consumer credit when it is following a monetary policy explicitly targeted at boosting consumer spending. If they want to head off borrowing growing so rapidly there is a very simple solution – reverse the rate cut and increased QE programme measures taken post-Brexit. Subsequent events have proven them totally unnecessary anyway.
It would appear that a good bit of the increased waving of credit cards came over the Christmas period. While the market took the poor figures emanating from Next last week as a sign that retailers had had a poor Christmas, this interpretation was rapidly revised when Tesco, Sainsbury’s and M&S, amongst others, announced increased sales over the period. Indeed M&S actually managed to see a strong increase in its clothing sales, a welcome change from its reliance on its food offering. However, the analysts have been out projecting that the retailers are in for a hard time as consumer spending should increasingly be curtailed by inflation rising at a faster rate than average earnings, to say nothing of having to repay credit card debt. The ongoing consequences for GDP growth, which is so often bailed out by consumers’ propensity for spending, are not encouraging.
The first figures to be announced will be the latest inflation numbers for December. The median forecast is for a month-on-month rise of 0.3%, bringing the annual figure to 1.4%, up from 1.2% at the end of the previous month. We doubt that this figure – or even a slightly higher one – would have much impact on the market, as everybody knows that the weakness of the currency will shift it a lot higher over the next few months. The inflationary pressures that are in the pipeline may be better illustrated by the producer price indices to be announced at the same time. The input price is expected at 1.5% on the month and 15% as the year-on-year figure. Several economists are going for a rather worse outcome. The outpour figures are much more constrained, and the median forecast for the monthly figure is 0.3% which would lead to an annual outcome of 3.4%, up from 2.9% previously.
On Wednesday the latest labour market figures are released. There has been some debate over whether unemployment may be starting to move upwards, but few surveys support this and the median expectation is that the unemployment rate will stay at 4.8%. The average earnings figure, however, is expected to have inched up a notch to 2.6%. Friday will see the latest retail sales figures released, which take in the crucial Christmas period. The median forecast is for a fall of 0.2% in the month. However, we believe that many of these forecasts were prepared before the latest tranche of results were announced and that a rise of 0.2% is more probable. If correct, this should bring the annual increase in retail sales to a heady 7.1%
A couple of other events taking place this week should be mentioned. The ECB meets to set monetary policy on Thursday. No change is expected, although Draghi is likely to repeat his message that current lax monetary policy needs to continue despite the increasing level of inflation and GDP growth and the reduction in unemployment. Finally, on Friday Donald Trump will be inaugurated as US President – no likely reduction in volatility is predicted.
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